special reports

Euro Pushes Higher Ahead of Busy Economic Calendar, US Fed Rate Decision (Euro Open)

Tuesday, 16 December 2008 05:08:23 GMT  |  Ilya Spivak, Currency Analyst

The Euro continued to push higher against the US dollar in overnight trading, breaching beyond the 1.37 level. Japanese service demand unexpectedly rose in October, while minutes from the last RBA reinforced expectations of a likely pause in rate cuts. Forex traders face economic data overkill in European trading hours, with the UK Consumer Price Index release headlining the calendar.

Key Overnight Developments

• Japanese Service Demand Unexpectedly Rises in October
• RBA Minutes Reiterate Likely Pause in Interest Rate Cuts


Critical Levels



The Euro continued to push higher in overnight trading, breaching beyond the 1.37 level. The British Pound consolidated in an atypically narrow 43-pip range around the 1.53 mark. Technical positioning suggests the US Dollar may be nearing a reversal as a measure of the greenback’s value against six top currencies tests critical support levels.


Asia Session Highlights



Japan’s Tertiary Industry Index surprised to the upside, showing service demand grew 0.4% in October. The result marks the first positive reading for the metric in three months, beating economists’ calls for a -0.2% decline. Still, traders are unlikely to see much follow-through. Yesterday’s Tankan survey saw business confidence fall to the lowest since 1999 in the fourth quarter on declining demand for Japanese cars and electronics. This will likely compound existing weakness in the labor market as firms cut back capacity, weighing on wages, incomes, and consequently pushing consumer spending lower.

The minutes from the last meeting of the Reserve Bank of Australia offered little in new insights. The RBA slashed rates by a greater than expected 1% this month but signaled policy will shift to neutral going forward. Governor Glenn Stevens said that “a major easing in monetary policy…together with spending measures announced by the Government and a large fall in the Australian dollar” will support demand over the year ahead. Stevens had previously suggested that the impressive magnitude of recent rate cuts, a full 3% since early September, was designed to quickly offer the necessary stimulus without extending rate cut expectations too far into 2009, thereby avoiding inflationary pressure from continued AUD depreciation.

Euro Session: What to Expect



Forex traders face economic data overkill in European trading hours, with the UK Consumer Price Index release headlining the calendar. Expectations call for a monthly drop of -0.3% to bring headline inflation to 3.9% in the year to November, the lowest since June. This means the pace of price growth will have declined close to 26% in just two months having peaked in September. The rapid pace of disinflation coupled with atypically aggressive rate cuts from the Bank of England has seen traders pare back expectations of future easing: overnight index swaps now price in just 50 basis points in rate cuts over the next 12 months having called for 175bps less than 2 weeks ago. The BOE has trimmed a hefty 3% off borrowing costs in a mere 2 months, most recently by 1% earlier this month.

Looking to the continent, Swiss Industrial Production is seen falling to 3.4% in the year through the third quarter, the lowest in over 2 years. As we mentioned in the latest Forex Trading Weekly Forecast, the downturn owes to weakness in external demand: “Swiss exporters count on the US, UK and the top three Euro Zone economies for over half of their demand. Deteriorating conditions across these markets mean cross-border sales growth is likely to continue to trend lower, eating away at the trade surplus.” Machinery, chemicals and metals are Switzerland’s top export commodities, so it is no wonder that industrial output has tumbled along with disappearing demand from overseas buyers. A separate report from the State Secretariat for Economic Affairs (SECO) is set to show official government economic forecasts. Last week, the Swiss National Bank predicted the economy will shrink in 2009 and 2010 (-0.5% and -1.0% respectively).

Advanced estimates of December’s German Purchasing Manager Index figures look to new record lows in sentiment for both the Manufacturing and Service sectors. The broader Euro Zone PMI release is set to follow suit.


To contact Ilya regarding this or other articles he has authored, please email him at ispivak at dailyfx dot com.

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